Cain, Perry flat tax proposals better options for U.S.

November 18, 2011|By Chandra Mishra

Two Republican presidential candidates, Herman Cain and Rick Perry, have proposed tax reform proposals to stimulate the economy and spur job growth. Both proposals share many desirable attributes, such as simplifying the complex tax code, lowering the corporate tax rate to become globally competitive again, eliminating the death tax and capital gains tax to increase capital mobility, eliminating taxes on repatriated foreign earnings of U.S. multinational companies so they make investments at home, and maintaining revenue neutrality so the tax cuts will not add to the federal budget deficits.

Herman Cain's "9-9-9" plan sounds simple and catchy, a key reason behind his quick rise in the polls. His plan calls for a 9 percent flat tax on individual income less charitable deductions (no taxes for those under the poverty line); a 9 percent flat tax on business income less all purchases from U.S.-located suppliers, capital investment, and net exports; and a 9 percent national sales tax on all purchases except for used goods, including previously owned homes and cars (introducing a new tax revenue source for the federal government). Cain claims that his tax plan is revenue-neutral.

Rick Perry also proposed a simple tax system, a 20 percent flat tax on individual income less standard exemptions and deductions for mortgage interest, charity, capital gains and dividends, state and local taxes; a 20 percent flat tax on corporate net income after dividends; and no taxes on repatriated foreign earnings. Perry wants to eliminate corporate tax loopholes and special interest tax breaks. He will keep the payroll taxes that fund government social insurance programs such as social security, Medicare, Medicaid, etc.

Although Cain claims that his tax plan eliminates payroll taxes, his 9 percent flat business income tax doesn't allow deductions for wages and salaries, thus effectively taxing the wages at 9 percent and preserving payroll taxes.

The flat tax proposals are not new in presidential campaigns. In the past, presidential candidates Jerry Brown and Steve Forbes have also run on flat tax platforms but they didn't win their party nominations. Both the current dismal state of our economy and our desperate search for solutions to spur economic growth have helped these proposals gain momentum among American voters.

Is a flat tax system better than the current progressive tax system? The two candidates, Herman Cain and Rick Perry, claim that it will save billions of dollars in tax preparation fees while simplifying the tax code. Critics, however, say that a flat tax system will be regressive; the federal tax burden will be shifted from the rich to the poor and middle class.

Besides, Cain's 9 percent new federal sales tax, a new consumption tax, may dampen consumer spending. The new tax source would also give Congress another way to take more money from Americans.

Both candidates claim that their plans will spur job growth and stimulate the economy, mostly by lowering the current tax rates. In one of my previous columns, published in the Sun Sentinel on Aug. 19, 2011, I asked that we cut the corporate tax rate from the current 35 percent to 20 percent, the median corporate tax rate for the developed countries, and eliminate the taxes on repatriation of foreign earnings. Currently the U.S. has the second highest corporate tax rate among the developed countries. In the same column I argued why a high corporate tax rate can move jobs overseas. Lowering the corporate tax rate will spur domestic job growth.

Both candidates claim that their plan will save the economy $430 billion spent on tax preparation and compliance fees paid to tax lawyers and accountants. Both state that the lower tax rates will bring in more tax revenues by expanding the taxpayer base. Large corporations and high income individuals can afford lawyers and accountants to take advantage of the special tax breaks and pay less in taxes. Lowering the individual tax rate, along with simplifying and closing the tax loopholes, will bring in more tax revenue, which will help bring down federal deficits and the national debt (both are historically high at present, choking economic growth and private sector job creation).

Indeed, in 1986, when President Reagan lowered the top tax bracket from 50 percent to 28 percent, it led to an enormous rise in federal tax revenues as well as a great expansion in small business and entrepreneurial activities, leading to more job creation and economic growth.

Now that our unemployment rate is very high, the annual federal deficit exceeds one trillion dollars, and the national debt is $15 trillion, it is time we lower the marginal individual and corporate tax rates, which will spur domestic job growth by preventing jobs from going overseas, and bring down the federal deficit and debt by expanding the taxpayer base and tax revenue. Both tax reform proposals have appealing features and most likely we will see a tax reform bill passed by Congress in 2013.

Dr. Chandra Mishra is a professor and co-editor-in-chief of the Entrepreneurship Research Journal (http://www.bepress.com/erj/). E-mail him at floridavc@gmail.com.